In two recent cases, two distribution companies could have avoided substantial litigation expenses (and more to come) if only they had proper written agreements
in place before there was a breakdown in their business
relationship. Both cases ended up in court; and both
have cost the companies significantly — not only in legal
and other costs to resolve the underlying disputes, but
also in terms of the lost opportunity costs of having
to deploy human capital to support the companies’
litigation activities. One key issue as to these cases is that
the parties could have controlled where their disputes
would be resolved, and under what rules — for example,
in court or arbitration, but the parties failed to do so
properly. This tactical mistake increased risk, exposure and
costs across the board in both cases.

In the first case, the parties — both sophisticated
business entities — simply failed at the beginning of the
relationship to execute an integrated, comprehensive
written agreement. As such, the battle ground as to
contract terms applied to the parties’ relationship
involved two diametrically opposed platforms: conflicting
purchase order terms and conditions versus course of
performance documents, oral testimony and thousands
of e-mail communications. Had the parties simply spelled
out (presumably with the help of counsel) their OEM
relationship, they could have likely avoided years of grief
and hundreds of thousands of dollars in expenses — even
if there was a legitimate dispute to address in court.

In the second case, the parties began their relationship
on a handshake and a very sketchy agreement relative
to the sharing of proprietary information between the
two business entities. It was not until more than a decade
into the relationship that the parties executed a written
distribution agreement, but they signed a document
that almost no lawyer would allow either party to
sign due to its poor wording. The second case is much
more complicated due to the fact that the contract as
signed contains an equally as poorly written arbitration
provision. Arbitration is a creature of contract. As such, its
contours are left in large part up to the parties to detail
in their business contract.

For example, the parties can enter into a broadarbitration provision, using the template suggested bythe American Arbitration Association (AAA), which inmost jurisdictions “covers” almost any dispute havingany relationship to the parties’ business relationship.But, the law applicable to the scope of arbitrationprovisions is, to say the least, in a state of flux, particularlywhen parties involved in the dispute did not sign thecontract containing the arbitration provision, which isthe fact pattern in the second case. Given allegations ofconspiracy to commit and aiding and abetting variousother illegal conduct, wrongs — including employees,former employees, subsidiary companies and third-parties— it becomes even more challenging from a legal andcost standpoint to sort out where the case should beheard or if it must be heard in different forums.Arbitration agreements, if done correctly, canadequately address dispute resolution, including anumber of “procedural” issues applicable in arbitration.A significant deficiency in the second case is the failureto name the arbitration tribunal that will administerthe arbitration, like the AAA. Subject to a number oflegal variances, when the AAA is designated as thetribunal responsible for overseeing and implementingthe arbitration of disputes, its various rules apply, buteven those rules have holes, depending on what thearbitration provision of the subject contract says andwhen the parties entered into their contract containingan arbitration provision.For example, the issue of expedited relief has beenraised by one of the parties. The AAA rules allow forexpedited relief, but only as to contracts executedafter October 2013. Similar issues exist across theboard as to the relief entitled when not spelled outin a comprehensive arbitration provision, so any suchprovision should be crafted carefully with the aid ofcounsel. While there is a plethora of common law thatcan overlay and unwind intended dispute resolutionprocedures, distributors and all businesses should beaware of these issues, as they can affect how disputes arehandled if the parties elect to incorporate an arbitrationBy Fred Mendelsohn